Did Solazyme just drop the “fuel” in biofuel?

Biofuels producer Solazyme inked a massive deal with Dow Chemical today to ship up to 60 million gallons of its algae-based oil as an insulating chemical for electric transformers in 2015.

Solazyme’s makes an oil produced from algae that is to replace petroleum that works in just about everything — including jet engines. But some of the most lucrative prospects for biofuel companies like Solazyme aren’t in the fuel business at all. They’re in producing chemicals for other purposes. That can include creating a line of anti-aging beauty products and food additives. Dow Chemical’s plan involves replacing an insulating petroleum-based oil that insulates electric transformers from heat and discharging electricity.

The company might as well kill its “fuel” business if it can get deals of this magnitude. Solazyme’s last significant deal to use its algae-produced oil for fuel was for 20,000 gallons of jet fuel in a deal with the United States Navy. That deal was worth around $8.5 million. The company recently refreshed that deal to 150,000 gallons of fuel, according to a spokesperson for Solazyme. To put things in perspective, the new deal with Dow Chemical is for up to 20 million gallons in 2013 and up to 60 million gallons in 2015, though there weren’t any specific details on pricing.

It might not be long before the company’s algae-produced oil becomes even more popular in the chemical space, since the company has set a target of between $60 to $80 per barrel. Futures for light, sweet crude oil cost more than $100 as of this morning — which will inevitably send the price of just about everything that uses petroleum as a production component up.

Science-driven research firm Lux Research said biomaterials production will grow faster than biofuels, with 17.7 percent growth each year. That growth would be driven by major deals like this one, according to the firm. The biochemical industry was also worth $11.7 billion last year, up 7 percent from 2009. That’s because about 95 percent of plastics use some petroleum in some way — and most companies are looking for a cheaper alternative.

Solazyme has a joint venture with food ingredient company Roquette and is working to develop renewable oils for soaps made by Unilever. The company has raised $125 million over four rounds of funding. Its investors include Morgan Stanley, Chevron Technology Ventures, Braemar Energy Ventures, Bluecrest Capital Finance, Lightspeed Venture Partners, Harris & Harris Group, The Roda Group and VantagePoint Venture Partners.